I'm not sure how much help I can offer as I've yet to actually handle a Return but there is a formal process in place now on ebay.ca. I think, however, the buyer has to initiate it through their Purchase History and the drop-down menu where the item is found, on the right-hand side of the page. My assumption is that you'll get the Final Value fee refunded automatically through this process but, if not, you can still call ebay manually to have it done.
As to the refund of everything except the shipping fee, I truly understand as a seller where you are coming from with that but ebay may frown on it nonetheless. Does your stated Returns policy mention a restocking fee? If you state on the listing that you allow 10 per cent (or whatever) as a restocking fee, you can use this to cover your postage losses if and when you have to issue a refund for a return. Restocking fees are allowed, if stated outright. Otherwise, ebay might automatically refund the entire amount, as is the Money Back Guarantee policy.
I won't presume to tell you how to conduct your business but you're still going to face feedback from the transaction and ultimately it's in your best interest to keep the buyer completely happy, regardless of whether the bracelet fit or not. I understand fit is beyond your control but you don't want to alienate him or her on the matter of recouping the postage lost, do you? If it were me, I'd eat it and chalk that loss up to the cost of keeping a buyer happy.
Just a thought.
Good luck as you carry forward.
